Wonkbook: Our last chance to stabilize the housing market

By
Ezra Klein

My colleagues Brady Dennis and Dina ElBoghdady got their hands on an early version of the settlement that the country's attorney generals and a few federal agencies are hammering out with the big banks. This is the endgame to the mortgage servicing mess that dominated the news some months ago: the banks, having repeatedly broken the law while handling mortgage paperwork and conducting foreclosures, need to strike some sort of deal with regulatory authorities so they're not nipped to death by thousands and thousands of lawsuits. That means the state AGs and regulators have some leverage: the banks need relief from them, and so the question is how much relief they can get for homeowners in turn.

The hope is that they can get something capable of stabilizing the housing market. For all that the economy is improving, housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline. "The number one reason for nervousness about the economy in the next six to nine months is the foreclosure crisis," Moody's economist Mark Zandi told me last week.

With Congress no longer interested in acting to ease the foreclosure crisis -- or, it seems, the jobs crisis -- this settlement is perhaps our last shot at stabilizing the housing market. The big thing that advocates are looking for is "principal modification": a process in which borrowers who are underwater on their homes would see the amount they owe to the bank reduced. That looks to be in the proposed settlement, but the devil is in the details -- how much does the principal get reduced by, and under what circumstances? But if you can get those details right, a lot of experts think they could provide substantial relief. "I do think principle writedown would be very effective. If you could get $20 billion in a fund, you could provide half a million in very solid modifications," Zandi says.

Top Stories

The government's proposed foreclosure settlement has leaked, report Brady Dennis and Dina ElBoghdady: "Last week, state attorneys general, joined by a handful of federal agencies that included the Justice Department and the new Consumer Financial Protection Bureau, submitted a 27-page term sheet obtained by The Washington Post of proposed changes to five of the nation's largest banks as its opening bid in what is expected to be a series of intense negotiations beginning in coming days. The proposals attempt to address wide-ranging complaints about the servicing process. One would require the servicers to provide a single point of contact for borrowers looking to modify their loans. Another would require them to develop a portal that would allow borrowers to submit and track documents electronically in real time.The document also spells out the conditions under which servicers should consider principal reductions for certain borrowers...everal attorneys general acknowledged that differences of opinion remain among various stakeholders on two key issues - how to structure a feasible modification program and the precise amount of penalties that should be levied on the banks, some of which could go toward principal reductions for borrowers."

Moderate Senate Democrats may not sign on to Harry Reid's proposed budget, report Shira Toeplitz and Scott Wong: "The Senate has yet to hold a vote on the latest budget proposals, but Majority Leader Harry Reid already has a problem on his hands with a group of politically rattled moderates. Several Democrats facing tough re-election races next year are not saying whether they will support the package of $10.5 billion in cuts backed by Democratic leaders. Key budget votes could happen as early as Tuesday. 'I feel strongly that the cuts are not large enough, but there are some cuts, so I don’t know whether I’ll be for it or against it,' Sen. Claire McCaskill (D-Mo.) told reporters Monday night. 'But I know it doesn’t go as far as we need to go.'"

The anti-deficit 'Gang of Six' is taking their campaign public, reports Lori Montgomery: "While Washington bickers noisily over cutting a small slice of the federal budget, Sens. Mark Warner, a Virginia Democrat, and Saxby Chambliss, a Georgia Republican, launched a campaign Monday to convince the public that merely cutting spending will do little to tame the $14 trillion national debt....In addition to Chambliss and Sen. Tom Coburn (R-Okla.), who are personal friends of House Speaker John A. Boehner (R-Ohio), the Gang of Six includes Sen. Mike Crapo (R-Idaho), a close adviser to Senate Majority Leader Mitch McConnell (R-Ky.); Kent Conrad (D-N.D.), the chairman of the Senate Budget Committee; and Richard J. Durbin (D-Ill.), the No. 2 Democrat in the Senate and a close Obama ally. Warner is the former governor who famously balanced the Virginia budget....The group has been meeting weekly, while about 30 other senators are watching from the sidelines to see whether the talks produce a politically viable deficit-reduction plan they can back. "

Wisconsin's Democrats are not folding yet, reports Michael Fletcher: "A chance to end the legislative standoff that has paralyzed the Wisconsin government for weeks seemed to slip away Monday after Gov. Scott Walker (R) accused the leader of the state Senate Democrats of blocking negotiations to end the impasse. After some of the 14 Senate Democrats who fled the state to block a vote on the governor's proposal to sharply curtail collective-bargaining rights for government workers in Wisconsin signaled their possible willingness to return, Walker called a news conference at which he accused the legislators of being the biggest impediments to ending the stalemate. The governor said members of his staff seemed to be making progress in negotiations with some of the absent Democrats, only to have Senate Minority Leader Mark Miller stand in the way."

Still to come: The White House is pushing for a free-trade pact with South Korea; a group of Senators is pushing Obama to name a new Medicare administrator; the GOP needs a health-care plan -- and fast; John McCain and James Inhofe reach a deal on earmarks; Congressional Democrats want Obama to open the Strategic Petroleum Reserve; and a tiny lotis hold a tiny umbrella.

Economy

The White House is pushing once more for a free trade pact with South Korea, reports Elizabeth Williamson: "U.S. Trade Representative Ron Kirk on Monday appealed to congressional leaders to begin work 'without delay' toward ratifying a free-trade deal with South Korea, even as Republican leaders continued to press to link such action with movement on trade pacts with Colombia and Panama. In a letter sent Monday to leaders of the House Ways and Means and Senate Finance committees, Mr. Kirk asked Congress to begin a process that would lead to a vote on the Korea pact this spring. His letter didn't address pending trade-opening deals with Colombia and Panama, which prompted criticism from House Ways and Means Chairman Dave Camp (R., Mich.)."

The IMF is rethinking its whole macroeconomic approach, reports Howard Schneider: "'Before the crisis, we had converged on a beautiful construction" to explain how markets could protect themselves from harm,' said Olivier Blanchard, an economics counselor at the International Monetary Fund. 'But beauty is not synonymous with truth.'...The economists driving the policy discussion, however, say they are far from developing a new playbook."

Commerce Secretary Gary Locke will become Ambassador to China, report Anne Kornblut and Ed O'Keefe: "President Obama will nominate Commerce Secretary Gary Locke as the next U.S. ambassador to China, senior administration officials said late Monday, continuing a game of musical chairs that has shuffled top administration officials at the start of the second half of Obama's term...Although Locke has not emerged as a star in the Obama orbit, he is Chinese American and well-regarded in the Chinese business community. He was Obama's third choice for the Commerce position, after the nomination of Bill Richardson was pulled over ethics concerns and Sen. Judd Gregg (R-N.H.) withdrew over policy disagreements."

GOP cuts will fall heavily on poor children, writes Tanya Somanader: "Rather than bolster the safety net beneath this staggering number of children, House Republicans took their budget scissors to it in the continuing resolution they passed last week. By drastically slashing programs including Head Start services and the Nutrition program for Women, Infants, and Children (WIC), the GOP cut off thousands of children from vital food packages; 218,000 children from comprehensive health, educational, and family support; 975,000 low-income students from academic support; 5 million children from access to anti-poverty services; and leave 'in the lurch thousands of families who rely on child care assistance to work.'... Republicans are adding impoverished children to the list of those who must sacrifice in order to reduce a deficit they didn’t cause."

The US could learn a lot from the tiny island nation of Mauritius, writes Joseph Stiglitz:http://bit.ly/htQVHU

Republicans' budget intransigence endangers entitlement reform, writes Bruce Bartlett: "It’s hard to see how the House and Senate are going to agree on a budget resolution for 2012; funding for 2011 is still in flux. Though the White House plays no formal role in the congressional budget process, the fact that the Senate is still controlled by Democrats means that House Republicans, who often talk as if they control the entire government, need to compromise...Unless Congress comes together on a budget resolution, it’s almost impossible to make significant progress on cutting entitlement programs such as Medicare and Medicaid. The reason? A completed budget resolution is necessary to enable a special legislative procedure called reconciliation."

A group of Senators wants Obama to name a new Medicare and Medicaid administrator, reports Robert Pear: "Members of Congress, including Democrats, have urged the Obama administration to search for another Medicare chief after concluding that the Senate is unlikely to confirm President Obama’s temporary appointee, Dr. Donald M. Berwick. Dr. Berwick’s principal deputy, Marilyn B. Tavenner, has emerged as a candidate to succeed him. Lawmakers of both parties said Monday that Ms. Tavenner, a former Virginia secretary of health and human resources with extensive management experience, could probably be confirmed. In a letter to the White House last week, 42 Republican senators urged Mr. Obama to withdraw the nomination of Dr. Berwick to head the Centers for Medicare and Medicaid Services."

Proposals to repeal health care reform's tax reporting provision could hurt the middle class, reports Brian Beutler: "Health care reform advocates are wise to the hidden middle-class taxes that passed the House last week, and are doing their best to kill them. The groups Families USA and Center on Budget and Policy Priorities have argued publicly against the proposal, and House and Senate Democrats have circulated memos on the Hill to raise awareness of the impact the proposal will have. As explained here, the penalties are designed to offset the cost of repealing a tax requirement on businesses...Under the House plan, if families get even modest compensation bumps after qualifying for health insurance subsidies, they can be required to reimburse the IRS with thousands of dollars."

Republicans need a health-care plan, writes Ezra Klein: "It's put-up-or-shut-up time for Republicans. They managed to make it through the health-care debate without offering serious solutions of their own, and - perhaps more impressive - through the election by promising to tell us their solutions after they'd won. But the jig is up. They need a health-care plan - and quickly."

Domestic Policy

Sens. James Inhofe and John McCain want to allow funding for local pet projects, reports Manu Raju: "n an unexpected twist, longtime earmark apologist Inhofe has quietly scored McCain’s endorsement on a proposal that would allow home-state projects if they are first authorized by Senate committees. It’s a major coup for Inhofe, who has emerged as the most aggressive Republican battling to save earmarks in a year when Congress has effectively banned them. And it’s a striking development in an at-times turbulent relationship between two hot-tempered septuagenarians who have sparred bitterly over the years."

Senate Democrats are proposing a harmful education cut, writes Cindy Brown: "The Senate Democrats countered the Republicans’ slash-and-burn H.R. 1 with their own proposal, released Friday. The measure...shortsightedly cuts $150 million from the Teacher Incentive Fund (TIF)...The program catalyzes the kinds of reforms human capital systems in our schools need. For instance, it requires participating states and districts to develop comprehensive and aligned approaches to attracting, evaluating, and developing educators. This alignment is particularly important because recentresearch supports the view that compensation reforms that are not combined with and aligned to other district reform strategies...are not likely to improve teacher practice or student achievement."

Congressional Democrats want Obama to open up the Strategic Petroleum Reserve, reports Steven Mufson: "Is $100-a-barrel oil a national emergency? Some Democratic lawmakers say yes, and assert that now is the time for the United States to dip into its Strategic Petroleum Reserve, which is brimming with 727 million barrels of crude. "We encourage you to consider utilizing the Strategic Petroleum Reserve (SPR) now," Rep. Edward J. Markey and two other House Democrats said in a letter sent to President Obama on Monday... 'From my perspective, it certainly would make sense for the president to begin selling oil from the SPR,' Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) said Monday, citing soaring prices and fighting in Libya."

Energy efficiency measures could backfire, writes John Tierney: "A growing number of economists say that the environmental benefits of energy efficiency have been oversold. Paradoxically, there could even be more emissions as a result of some improvements in energy efficiency, these economists say. The problem is known as the energy rebound effect. While there’s no doubt that fuel-efficient cars burn less gasoline per mile, the lower cost at the pump tends to encourage extra driving. There’s also an indirect rebound effect as drivers use the money they save on gasoline to buy other things that produce greenhouse emissions, like new electronic gadgets or vacation trips on fuel-burning planes...In some cases, the overall result can be what’s called 'backfire': more energy use than would have occurred without the improved efficiency."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams. Graph credit: Calculated Risk.

No, don't stabilize the housing market when it's still 10-15% above trend level--that'll just cause people to overpay for housing. Dean Baker has other suggestions to help people underwater besides propping up a bubble-deflating-but-still-too-high market.

"housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline...'I do think principle writedown would be very effective. If you could get $20 billion in a fund, you could provide half a million in very solid modifications,' Zandi says."

Assuming that what is said here is true, we are talking about potentially preventing 1 out of 22 expected foreclosures. And HAMP was supposed to prevent 3-4 million foreclosures, right? How'd that one work out?

We should just stop trying to prop up the market, which only delays the inevitable. Let prices bottom, so that housing acitivty can start accelerating again and support a new recovery.

It is probably best simply to let the customers who were harmed have their day in court.

"A growing number of economists say that the environmental benefits of energy efficiency have been oversold. Paradoxically, there could even be more emissions as a result of some improvements in energy efficiency, these economists say. The problem is known as the energy rebound effect. While there’s no doubt that fuel-efficient cars burn less gasoline per mile, the lower cost at the pump tends to encourage extra driving. There’s also an indirect rebound effect as drivers use the money they save on gasoline to buy other things that produce greenhouse emissions, like new electronic gadgets or vacation trips on fuel-burning planes...In some cases, the overall result can be what’s called 'backfire': more energy use than would have occurred without the improved efficiency."

I can see more efficient vehicles leading to greater energy use, but more emissions than with less efficient vehicles? I'm skeptical.

Is the reverse plausible? Would mandating inefficient vehicles decrease emissions? In that case, isn't the $7,500 tax credit on the Volt/LEAF effectively subsidizing a negative externality?

The percentage of people who can afford their houses with a modification is small. People have been in these houses, for free, for almost three years. Clean up the affidavits and complete foreclosure of the remaining housing stock. Get real, housing is not coming back for years.

Why is it a federal job to step in between the banks and the homeowners?
If the banks have done some illict thing the impacted group should go after the banks.
How does it serve anybody for the feds to step in and "settle" thereby diverting money from the victims of any bank action to a different group chosen by the banks and the administration? Why is it "important" to "stabilize" housing prices? Aren't we once again choosing a group of winners (people who overpaid for their houses) and punishing a different group (first time home buyers and careful savers who waited for prices to fall before buying)?
The careful planners are being penalized to benefit the foolish and those who borrowed easy money never intending to pay it back from the start.
The argument seems to be that lower housing prices will make people feel less "wealthy" and hurt the economy but maybe marking the housing market to it's actual value and encouraging smart savers to buy is a better strategy.
I think that government policies should reward careful savers, protect the value of the currency and punish foolish investments. people who went out and bought houses they could not afford should lose those houses and the mortgage brokers, bankers and politicians who caused this moral hazard should be punished.
If the banks committed a crime they should suffer, not the tax payers or folks out looking to buy a house.
I'll bet a buck that if you scratch the surface of this "$20 billion dollar settlement" you'll find that the real story is that the banks are going to off load their liability on the tax payers while the administration provides political cover.
The legions of D.C. $120k plus bennies latte sipping, Georgetown lunchers will probably suck the $20 billion in as a special benefit for their friends and relatives (a little bureaucratic bon bon) while the careful folks who save their money out in hooterville will get the tab for the banks liability. The few people who benefit from and "mortgage balance lowering" will learn the important message that morality in America is optional at best and probably downright foolish.
It always seems to work out this way... politicians get fed, bureaucrats get fed and the hard working, careful folks out in middle America get screwed.
Let's say that the houses were "marked to market", what's the worst that could happen?
If you live in a house it really doesn't matter but if you own 5-10-20 houses bought on credit you might have to sell your Bentley. The banks own millions of house and they should be taking the hit here.... why is it that the taxpayers are going to take the hit?
Steve

Ezra,
I love the way bureaucratic speak refers to the blocking of the massive unprecedented 1099 reporting requirements as "repealing a tax requirement on businesses". The 1099 law will incur huge debilitating costs on small business owners and while it may cause more money to come in it isn't a "new tax" it's a draconian in your face, into your privacy reporting requirement.
The "tax increase" on the other hand, is a reduction in proposed subsidy.
This sort of doublespeak is exactly what the bureaucratic class is paid to craft. Can you imagine how many billions could be saved if we simply sent all these DC bureaucrats back to hooterville so they could struggle for their daily bread like the rest of us?
Imagine if we simply made the decision to send every other federal bureaucrat home? I'll bet that the only people who would notice the difference are the barristas at the DC Starbucks. Now that's a "payfor" that I could get directly on board with!
I bet that they would flood out of those big brick buildings and march in circles, clutching skinny lattes and screaming about "justice!".
Weepy Sunday morning news commentators would assure us that "this nation is making a huge mistake!" and the democrats who play "conservative" in the DC passion play would solemnly tell the folks back in hooterville that they are for smaller government but actually laying off any bureaucrats is "too much, too soon".
There would be a flood of "polls" declaring that the american people love bureaucrats, a host of psuedo-intellectuals scribblers would declare it to be a disaster in the making which would only "raise unemployment and cripple the economy".
There would be loving, touching, sad stories of brooks brothers suited, unemployed GS 40s begging for change at 15th and H while clutching their sad, empty, tall skinny recyclable starbucks cups. It makes me tear up a bit to even type about it....
OK, where were we? Oh yeah, reducing an, as yet, unpaid future subsidy for insurance is a "tax increase", and limiting an unbelieveably invasive, onerous reporting requirement is a "tax break".... and before I forget, promising people trillions in future long term care subsidies for a few bucks a month now is actually accounted for as "income"...
Ezra, you live in a, through the looking glass, fantasy world where a group of the most selfish untrustworthy humans ever born congregate together around a stolen credit card and shout "does it still work?"..
Steve

I told you last year that there would be a tobacco type settlement before the summer of this year. Not sure how much the banks want to fight this, because it won't hurt the banks per se, it will hurt the mortgage market.

Bank revenues will fall at those banks where mortgages are a strong part of earnings. However the quality of the individual mortgages will be higher. This is because banks lending will dry up and credit decrease.

Far from stabilizing housing prices, you're almost creating a perfect storm against housing.

As I wrote last week, you have the end of QE2 which will drive up interest rates at least 100 basis points. You have the supposed phasing out of Fannie and Freddie, which will ALSO drive up interest rates if it begins. You have the new QRM mortgages rules from Dodd-Frank as discussed by this blogger:

"As FHA mortgages would be exempt from QRM, it is very easy to imagine a situation where FHA loan volume greatly increases as a result of the rule change. The FHA only requires a down payment of 3.5%, but I can easily picture those with less than 20 percent down opting for an FHA mortgage in order to avoid higher mortgage rates resulting from the risk-retention requirements (obviously it will depend on whether or not the increased rates cost more or less than the FHA’s up front mortgage insurance premiums, which remains to be seen).

In any case, this could put the FHA in a tough spot, as it is already undercapitalized, and was never really intended to do the volume of loans that it is doing presently. The VA and USDA could also see increased loan volume, but the increase wouldn’t be as great as with the FHA, as these loans are restricted to a smaller group of people."

(that boils down to passing risk into the FHA because they won't be able to charge a true premium for the insurance or it will be unaffordable)

These new rules proprosed in the bank settlement will make it much tougher to foreclose. What happens when banks have to make an investment that is illiquid and for which the securitization is not as clear as it used to be? They either raise the rates to compensate, or they will make many fewer loans.

So no, this won't stabilize the housing market in any way, unless you consider simply slowing it to a trickle to be stabilization.

HOWEVER, this may be simply a political ploy to "leak" these terms as a trial balloon. Let's hope so and that the actual settlement will be considerably better!

If i was a skeptical person in general I'd say Dems put it (the 1099 provision) in there knowing they'd take it out at some point but at least they want to say they want to "pay for it" so that's good.

Another skeptical side of me would say don't the Democrats realize that this "X" Billion dollars being increased in tax revenues received results in "X" amount of job layoffs in small businesses? Isn't that the tact they like to take when arguing their points regarding stimulus? Isn't this money staying in small business owners stimulative??

justin84, letting the market correct itself would be great but for the negative externalities and spillovers that such a shock would cause for the rest of us. To the extent that some move on the part of Congress can "let it down easy," I think it should.

It's really too bad that economies keep falling for real estate speculation (especially residential); it happened in Southeast Asia in the 90s, it's happened over and over again over history.

As many are already aware, this legislation would not do much and would only delay the inevitable. Most people are so underwater that reasonable modifications would not keep them in their home. The individuals and banks responsible should take the loss.

As one person has already mentioned, home prices are still a good 10% above the long term trend. With a consensus on winding down Fannie and Freddie, as well as an increase in interest rates that must occur in the future, there is no doubt that home production and sales will slow down to a more reasonable rate and prices will go down further. The government will not be able to stop this without drastically damaging the economy as a whole, and throwing savers and prudent individuals under the bus for being responsible.

Let the correction happen so prices can rise in relation to incomes and ability to pay. Inflating the bubble again is not a solution to the problem.

No, Ezra, the government can't "stabilize" the housing market. It can only interfere and delay the inevitable. We don't even WANT the gov't to intervene, you know, because it prevents the housing market (temporarily) from hitting bottom. You know, Ezra, where people will start buying again. Oh, thats right, being the silent spokesperson for the corporate fascist elite that you are, you're only concerned with the banks getting what they want. Lets see, why don't we all go down to the beach and hold hands and hold back the incoming tide. Oops! No way it works, you clown. You have no education in economics. You're a well-connected (your daddy?) pimple on the bottom of a soon-to-be hanging from the lightpoles class of elites. You say " the banks, having repeatedly broken the law while handling mortgage paperwork and conducting foreclosures," blah blah blah, but ignore the fact that it was the Congress which, under pressure from their masters the banks, forced mortgage banks into providing subprime loans, alt-a, etc. in order to stop "red-lining" and such. When it all went bad (as of course it would when math doesn't add up), people like you and Jesse Jackson call it predatory lending and refuse to accept any blame for what happened. Point the finger, Ezra, but eventually when the American sheeple finally figure out how they were screwed, they won't look kindly on liars with an agenda like you.

The best way to ease the foreclosure crisis is to get people back to work, and let the housing market find its own bottom.
You can't lose money on a house unless you sell it for less than you paid. If you have a job, maybe you won't have to sell (or lose) your house.

"but ignore the fact that it was the Congress which, under pressure from their masters the banks, forced mortgage banks into providing subprime loans, alt-a, etc. in order to stop "red-lining" and such."

I try not so say this too often on here, but you're a complete financial idiot who doesn't have the slightest idea what you're talking about.

I guess not eveybody gets a passing grade, even at Glenn Beck University!

In a traditional refinance, insist on a good-faith estimate of the costs up front, before you give the lender a penny, search the web for "123 Mortgage Refi" I would strongly recommend them. They got me 2.891% rate!

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